FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-19621
APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
MINNESOTA
(State or other jurisdiction of 41-1454591
incorporation or organization) (I.R.S. Employer
7400 Excelsior Blvd. Identification No.)
Minneapolis, Minnesota 55426-4517
(Address of principal executive offices)
(612) 930-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES __X__ NO _____
As of November 13, 1998, the number of shares outstanding of the registrant's no
par value common stock was 1,236,744 shares.
APPLIANCE RECYCLING CENTERS of AMERICA, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements:
Consolidated Balance Sheets as of
October 3, 1998 and January 3, 1998
Consolidated Statements of Operations for the
Three and Nine Months Ended October 3, 1998
and September 27, 1997
Consolidated Statements of Cash Flows for the
Nine Months Ended October 3, 1998
and September 27, 1997
Notes to Consolidated Financial Statements
Item 2: Management's Discussion and Analysis
of Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
October 3, January 3,
1998 1998
- - -------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 696,000 $ 13,000
Accounts receivable, net of allowance of $75,000
and $35,000, respectively 1,170,000 736,000
Inventories 1,937,000 694,000
Other current assets 135,000 140,000
Refundable income taxes -- 29,000
- - -------------------------------------------------------------------------------------------------------
Total current assets $ 3,938,000 $ 1,612,000
- - -------------------------------------------------------------------------------------------------------
Property and Equipment, at cost
Land $ 2,103,000 $ 2,103,000
Buildings and improvements 4,156,000 3,955,000
Equipment 3,718,000 5,461,000
- - -------------------------------------------------------------------------------------------------------
$ 9,977,000 $ 11,519,000
Less accumulated depreciation 4,070,000 4,807,000
- - -------------------------------------------------------------------------------------------------------
Net property and equipment $ 5,907,000 $ 6,712,000
- - -------------------------------------------------------------------------------------------------------
Other Assets $ 335,000 $ 55,000
Goodwill, net 162,000 190,000
- - -------------------------------------------------------------------------------------------------------
Total assets $ 10,342,000 $ 8,569,000
=======================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of credit $ 526,000 $ 1,513,000
Current maturities of long-term obligations 107,000 101,000
Accounts payable 1,808,000 1,136,000
Accrued expenses 789,000 821,000
- - -------------------------------------------------------------------------------------------------------
Total current liabilities $ 3,230,000 $ 3,571,000
Long-Term Obligations, less current maturities 4,955,000 1,633,000
- - -------------------------------------------------------------------------------------------------------
Total liabilities $ 8,185,000 $ 5,204,000
- - -------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, no par value; authorized 10,000,000
shares; issued and outstanding 1,237,000 shares as of
October 3, 1998 and 1,137,000 shares as of January 3, 1998 $ 10,857,000 $ 10,350,000
Accumulated deficit (8,700,000) (6,985,000)
- - -------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 2,157,000 $ 3,365,000
- - -------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 10,342,000 $ 8,569,000
=======================================================================================================
See Notes to Consolidated Financial Statements.
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
-------------------------------------------------------------------
October 3, September 27, October 3, September 27,
1998 1997 1998 1997
- - ----------------------------------------------------------------------------------------------------------------------------
Revenues
Retail revenues $ 2,170,000 $ 1,047,000 $ 5,638,000 $ 3,013,000
Recycling revenues 1,846,000 1,411,000 4,013,000 4,881,000
Byproduct revenues 238,000 331,000 828,000 1,134,000
- - ----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 4,254,000 $ 2,789,000 $ 10,479,000 $ 9,028,000
Cost of Revenues 2,529,000 1,716,000 6,944,000 5,077,000
- - ----------------------------------------------------------------------------------------------------------------------------
Gross profit $ 1,725,000 $ 1,073,000 $ 3,535,000 $ 3,951,000
Selling, General and Administrative Expenses 1,602,000 1,175,000 4,567,000 3,842,000
Loss on Impaired Assets -- -- 518,000 --
- - ----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 123,000 $ (102,000) $ (1,550,000) $ 109,000
Other Income (Expense)
Other income 8,000 (1,000) 277,000 118,000
Interest income -- 4,000 1,000 8,000
Interest expense (182,000) (82,000) (412,000) (255,000)
- - ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes
and minority interest $ (51,000) $ (181,000) $ (1,684,000) $ (20,000)
Provision for (Benefit of) Income Taxes 30,000 (2,000) 31,000 (31,000)
- - ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest $ (81,000) $ (179,000) $ (1,715,000) $ 11,000
Minority Interest in Net Income of Subsidiary -- 31,000 -- 85,000
- - ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (81,000) $ (210,000) $ (1,715,000) $ (74,000)
============================================================================================================================
Basic and Diluted Earnings (Loss) per Common Share $ (0.07) $ (0.18) $ (1.44) $ (0.07)
============================================================================================================================
Weighted Average Number of Common Shares 1,237,000 1,137,000 1,187,000 1,137,000
============================================================================================================================
See Notes to Consolidated Financial Statements.
Appliance Recycling Centers of America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
-------------------------------
October 3, September 27,
1998 1997
- - -----------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income (loss) $ (1,715,000) $ (74,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 587,000 814,000
Minority interest in subsidiary -- 85,000
Loss on impaired assets 518,000 --
(Gain) loss on sale of equipment (232,000) (66,000)
Change in assets and liabilities:
(Increase) decrease in:
Receivables (434,000) 129,000
Inventories (1,243,000) (16,000)
Other current assets 5,000 56,000
Refundable income taxes 29,000 371,000
Increase (decrease) in:
Accounts payable 672,000 (469,000)
Accrued expenses (32,000) (419,000)
- - -----------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $ (1,845,000) $ 411,000
- - -----------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of property and equipment $ (270,000) $ (204,000)
Proceeds from disposal of property and equipment 237,000 86,000
- - -----------------------------------------------------------------------------------------------------
Net cash used in investing activities $ (33,000) $ (118,000)
- - -----------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Decrease in line of credit $ (987,000) $ (299,000)
Payments on long-term obligations (389,000) (172,000)
Proceeds from sale of common stock 200,000 --
Proceeds from long-term debt obligations 3,718,000 --
Proceeds ascribed to warrants issued in conjunction
with long-term debt 307,000 --
Fees from financing activities (288,000) --
- - -----------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities $ 2,561,000 $ (471,000)
- - -----------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents $ 683,000 $ (178,000)
Cash and Cash Equivalents
Beginning 13,000 280,000
- - -----------------------------------------------------------------------------------------------------
Ending $ 696,000 $ 102,000
- - -----------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash payments (receipts) for:
Interest $ 414,000 $ 255,000
Income taxes net of refunds $ 1,000 $ (400,000)
=====================================================================================================
See Notes to Consolidated Financial Statements.
Appliance Recycling Centers of America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
1. Financial Statements
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of
only normal, recurring accruals) necessary to present fairly the
financial position of the Company and its subsidiaries as of October 3,
1998, and the results of operations for the three-month and nine-month
periods and its cash flows for the nine-month periods ended October 3,
1998 and September 27, 1997. The results of operations for any interim
period are not necessarily indicative of the results for the year. These
interim consolidated financial statements should be read in conjunction
with the Company's annual financial statements and related notes in the
Company's Annual Report on Form 10-K for the year ended January 3, 1998.
2. Accrued Expenses Accrued expenses were as follows:
October 3, January 3,
1998 1998
--------- ---------
Compensation $220,000 $167,000
Lease contingencies
and closing costs 110,000 289,000
Other 459,000 365,000
--------- ---------
$789,000 $821,000
========= =========
3. Preferred Stock
In April 1998, the Company's shareholders approved an amendment to the
Company's Articles of Incorporation authorizing two million shares of
Preferred Stock of the Company ("Preferred Stock") which may be issued
from time to time in one or more series having such rights, powers,
preferences and designations as the Board of Directors may determine.
4. Loss On Impaired Assets
During the three months ended July 4, 1998, the Company elected to
curtail its appliance shredding operation and intensify its strategic
focus on appliance retailing. As a result, the Company recorded $518,000
as a loss on impaired assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
5. Whirlpool Agreement
On July 8, 1998, the Company entered into an agreement with Whirlpool
Corporation for the acquisition of distressed appliances ("Whirlpool
Agreement"). Under the Whirlpool Agreement, the Company has the
exclusive right and has the obligation to purchase from Whirlpool all
Whirlpool distressed appliances in the Midwest and certain western
states. Under the Whirlpool Agreement, the Company must purchase up to
$3,000,000 of distressed appliances in any three-month period, with
certain exceptions. The Whirlpool Agreement may be terminated by either
party upon 180 days' written notice, however, it is not terminable by
Whirlpool before July 8, 1999 except for cause. Cause is defined in the
Whirlpool Agreement to include (i) the Company's breach of the Whirlpool
Agreement, (ii) the Company's misappropriation of Whirlpool funds, (iii)
the Company ceases to exist as a going concern, or (iv) the Company uses
Whirlpool trademarks without the written consent of Whirlpool. In
addition, the Company has agreed to indemnify Whirlpool for certain
claims, allegations or losses with respect to Whirlpool appliances sold
by the Company. The Agreement is expected to supply the Company's
Encore(R)and Appliance$mart(SM) retail outlets with a significant supply
of Whirlpool appliances.
PART I: ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
The following discussion and analysis provides information that
management believes is relevant to an assessment and understanding of
the Company's level of operations and financial condition. This
discussion should be read with the consolidated financial statements
appearing in Item 1.
RESULTS OF OPERATIONS
The Company generates revenues from three sources: retail revenues,
recycling revenues and byproduct revenues. Retail revenues are sales of
appliances, extended warranty sales and delivery fees. Recycling
revenues are fees charged for the disposal of appliances. Byproduct
revenues are sales of materials generated from processed appliances.
Total revenues for the three and nine months ended October 3, 1998 were
$4,254,000 and $10,479,000, respectively, compared to $2,789,000 and
$9,028,000 for the same periods in the prior year.
Retail revenues for the three and nine months ended October 3, 1998
increased by $1,123,000 or 107.3% and $2,625,000 or 87.1%, respectively,
from the same periods in the prior year. Third quarter same-store retail
sales increased 138% (a sales comparison of 10 stores that were open the
entire third quarters of 1998 and 1997). Retail sales accounted for
approximately 51% of revenues in the third quarter of 1998. The increase
in retail sales was primarily due to increased sales of Whirlpool
product.
In July 1998, the Company announced that it had entered into a contract
with Whirlpool Corporation to acquire its distressed appliances
(including "scratch and dent" units with only cosmetic imperfections)
from distribution centers serving the Midwest and certain western
states.
Currently, the Company has 11 retail locations. The Company plans to
continue focusing on increasing sales in the geographic areas where it
is currently located. It plans to consolidate certain of its existing
stores and open an additional three to five new stores over the next 12
months. The Company experiences seasonal fluctuations and expects retail
sales to be higher in the second and third calendar quarters than in the
first and fourth calendar quarters, reflecting consumer purchasing
cycles.
RESULTS OF OPERATIONS - continued
Recycling revenues increased for the three months ended October 3, 1998
by $435,000 or 30.8% and decreased for the nine months ended October 3,
1998 by $868,000 or 17.8% as compared to the same periods in the prior
year. The increase in recycling revenues in the third quarter of 1998
was primarily due to the increase in refrigerator recycling volume
related to the contract with Southern California Edison Company
("Edison"). The decrease in recycling revenues for the nine months ended
October 3, 1998 was primarily due to lower contract volume of appliances
than in the previous year. The contract with Edison, which ended
September 30, 1998, has generated $3.0 million in revenues in 1998. At
this time, no definitive contract has been entered into for the fourth
quarter of 1998. However, Edison has indicated its intention to extend
its refrigerator recycling program through December 1998. Also, no
definitive contract has been entered into for 1999. Edison is expected
to file its proposed program for 1999 with the California Public
Utilities Commission in mid-November 1998.
Byproduct revenues for the three and nine months ended October 3, 1998
decreased by $93,000 or 28.1% and $306,000 or 27.0%, respectively, from
the same periods in the prior year. The decrease was primarily due to
lower sales of reclaimed chlorofluorocarbons due to fewer refrigerators
being recycled and lower scrap revenue due to a decrease in scrap
prices.
Gross profit as a percentage of total revenues for the three months
ended October 3, 1998 increased to 40.6% from 38.5% and decreased to
33.7% from 43.8% for the nine months ended October 3, 1998. The increase
in the third quarter of 1998 was primarily due to an increase in
recycling revenues related to the Edison contract. The decrease in gross
profit as a percentage of total revenues for the nine months ended
October 3, 1998 was primarily due to retail revenues, which have a lower
gross profit than recycling revenues, being a higher percentage of total
revenues. Gross profit as a percentage of total revenues for future
periods can be affected favorably or unfavorably by numerous factors,
including the volume of appliances recycled from the Edison contract,
the volume of Whirlpool product sold during the period and the price and
volume of byproduct revenues. The Company expects margins to continue to
decline as retail revenues become a higher percentage of total revenues.
RESULTS OF OPERATIONS - continued
Selling, general and administrative expenses for the three and nine
months ended October 3, 1998 increased by $427,000 or 36.3% and $725,000
or 18.9%, respectively, from the same periods in 1997. Selling expenses
for the three and nine months ended October 3, 1998 increased by
$148,000 or 41.5% and $357,000 or 32.8%, respectively, from the same
periods in 1997. The increase in selling expenses for the third quarter
of 1998 compared to 1997 was primarily due to an increase in advertising
for the retail stores and an increase in sales commissions. The increase
in selling expenses for the nine months ended October 3, 1998 was
primarily due to an increase in costs associated with opening an
additional retail store during the first quarter of 1998, an increase in
sales commissions and an increase in advertising during the first nine
months of 1998. General and administrative expenses for the three and
nine months ended October 3, 1998 increased by $279,000 or 34.1% and
$368,000 or 13.4%, respectively, from the same periods in 1997. The
increase in general and administrative expenses was primarily due to
increased expenses related to personnel costs.
The Company took a one-time charge of $518,000 during the three months
ended July 4, 1998 related to a loss on impaired assets associated with
the Company's decision to curtail the appliance shredding operation of
its recycling business located primarily at the Company's Minneapolis
center.
Interest expense for the three and nine months ended October 3, 1998
increased by $100,000 or 122.0% and $157,000 or 61.6%, respectively,
from the same periods in 1997. The increase in interest expense was due
to a higher average borrowed amount for the three and nine months ended
October 3, 1998 than in the same periods in 1997.
The Company recorded a provision for income taxes for the nine months
ended October 3, 1998 of $31,000. The Company recorded a benefit of
income taxes of $31,000 and a related receivable of $29,000 for the nine
months ended September 27, 1997 due to the liquidation of its Canadian
subsidiary. The income taxes receivable became unrealizable during the
third quarter of 1998 upon the liquidation of its Canadian subsidiary.
The Company also has available net operating loss carryforwards that
total approximately $7,344,000 which expire in the years 2011 through
2013. At October 3, 1998, the Company had a valuation allowance recorded
against its net deferred tax assets of approximately $3,632,000, due to
uncertainty of realization. Realization of deferred tax assets is
dependent upon the generation of sufficient future taxable income during
the period that deductible temporary differences and carryforwards are
expected to become available to reduce taxable income.
RESULTS OF OPERATIONS - continued
During the fourth quarter of 1997, the Company purchased all the
minority shareholder's stock in ARCA California, Inc., a subsidiary of
the Company. Prior to that time, the California subsidiary was owned 80%
by the Company and 20% by a minority shareholder. Accordingly, a
minority interest was recorded for the three and nine months ended
September 27, 1997, of $31,000 and $85,000, respectively.
The Company recorded a net loss of $81,000 (or $.07 per share) for the
three months and $1,715,000 (or $1.44 per share) for the nine months
ended October 3, 1998, compared to a net loss of $210,000 (or $.18 per
share) and $74,000 (or $.07 per share) in the same periods of 1997. The
decrease in income was primarily due to the one-time charge and higher
operating and selling, general and administrative expenses offset by
higher retail sales, as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At October 3, 1998, the Company had a working capital surplus of
$708,000 compared to a working capital deficit of $1,959,000 at January
3, 1998. Cash and cash equivalents increased to $696,000 at October 3,
1998 from $13,000 at January 3, 1998. Net cash used in operating
activities was $1,845,000 for the nine months ended October 3, 1998
compared to net cash provided by operating activities of $411,000 in the
same period of 1997. The decrease in cash provided by operating
activities was primarily due to the net loss for the period plus an
increase in inventories, offset by an increase in accounts payable and
the loss on impaired assets.
The Company's capital expenditures for the nine months ended October 3,
1998 and September 27, 1997 were approximately $270,000 and $204,000,
respectively. The 1998 and 1997 capital expenditures were primarily
related to building improvements.
As of October 3, 1998, the Company had a $2.0 million line of credit
with a lender. The interest rate as of October 3, 1998 was 13-1/4%. The
amount of borrowings available under the line of credit is based on a
formula using receivables and inventories. The line of credit has a
stated maturity date of August 30, 1999 and provides that the lender may
demand payment in full of the entire outstanding balance of the loan at
any time. The line of credit is secured by receivables and inventories
and is guaranteed by the President of the Company. The loan also
requires that the Company meet certain financial covenants, provides
payment penalties for noncompliance, limits the amount of other debt the
Company can incur, limits the amount of spending on fixed assets and
limits payments of dividends. At October 3, 1998, the Company's unused
borrowing capacity was $600,000.
LIQUIDITY AND CAPITAL RESOURCES - continued
On May 19, 1998, the Company sold in a private placement, 100,000 shares
of Common Stock at a price of $2.00 per share. The sale, which
represents approximately 8% of the Common Stock outstanding after such
sale, was made to an institutional investor. The proceeds were used for
additional working capital.
In June 1998, the Company entered into a ten-year, 9.88% mortgage
loan for $250,000. The proceeds from the mortgage loan were used to
remodel one of its retail stores.
In July 1998, the Company issued 12% subordinate promissory notes in the
principal amount of $275,000, plus warrants to purchase Common Stock.
The notes were paid in September 1998 with proceeds of the September
1998 Loan (as defined below). The lenders also received an aggregate of
68,750 warrants to purchase the Company's Common Stock at $2.25 per
share. The loan proceeds were used to purchase inventory and provide
additional working capital.
In September 1998, the Company announced that it had entered into a loan
agreement with a lender resulting in gross proceeds of $3.5 million
("September 1998 Loan"). The maturity date for the loan is September 30,
2005 and the annual interest rate is 13%. The loan is secured by all the
Company's personal property and all of its real estate. The Company
issued to the lender, in connection with the loan, a warrant to purchase
700,000 shares of Common Stock at $2.50 per share, which price may be
adjusted in certain circumstances. The Company also issued to the
investment banker, in connection with the September 1998 Loan, a warrant
to purchase 125,000 shares of Common Stock at $2.50 per share and paid a
placement fee of $180,000. The Company used the proceeds to repay
certain indebtedness (including approximately $1,500,000 of outstanding
indebtedness), to finance inventory and for other general corporate
purposes.
The portion of the gross loan proceeds ascribed to the warrants issued
in conjunction with debt was $307,000.
The Company does not believe that it has any significant risk related to
interest rate fluctuation since it has only fixed rate debt, except the
line of credit.
As previously reported, effective September 8, 1998, the Company was
delisted from The Nasdaq SmallCap Market because it no longer complied
with The Nasdaq Stock Market's listing requirements.
LIQUIDITY AND CAPITAL RESOURCES - continued
The Company believes, based on the anticipated revenues from the
expected Edison contract, the anticipated sales per retail store and the
anticipated gross profit, that its current cash balance, funds generated
from operations, the current loan and its current line of credit will be
sufficient to finance its operations and capital expenditures through
December 1998. In addition to the above, the Company is currently
investigating avenues to raise additional working capital and to secure
an increased line of credit to finance its operations and capital
expenditures through December 1999. However, if the Company is unable to
raise sufficient additional working capital or if it cannot secure an
increased line of credit, it may be unable to expand its retail
operations on the currently anticipated schedule, if at all. The
Company's total capital requirements will depend, among other things as
discussed below, on the number of recycling centers operating and the
number and size of retail stores operating during the fiscal year.
Currently, the Company has four centers and 11 stores in operation. If
revenues are lower than anticipated or expenses are higher than
anticipated or the line of credit cannot be increased, the Company may
require higher levels of additional capital than is currently expected
to finance operations. Sources of additional financing may include
further debt financing or the sale of equity or other securities. There
can be no assurance that such additional working capital or other
sources of financing will be available or available on terms
satisfactory to the Company or permitted by the Company's current
lender.
YEAR 2000
Based on a recent assessment, the Company determined that it will be
required to modify or replace significant portions of its software so
that its computer systems will properly utilize dates beyond December
31, 1999. The Company presently believes that with modifications to
existing software and conversions to new software, the Year 2000 Issue
can be mitigated. However, if such modifications and conversions are not
made, or are not completed in a timely manner, the Year 2000 Issue could
have a material impact on the operations of the Company.
The Company will utilize both internal and external resources to replace
and test computer software for Year 2000 modifications. The Company
plans to complete the Year 2000 project no later than June 30, 1999. The
costs of the project will be funded through operating cash flows. A
portion of the costs will be incurred to purchase new software, which
will be capitalized. The remaining portion of the cost will be expensed
as incurred over the next year. The overall cost of the project is not
expected to have a material effect on the results of operations.
YEAR 2000 - continued
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources, third
party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors that might cause
such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar
uncertainties.
FORWARD-LOOKING STATEMENTS
Statements regarding the Company's future operations, need for working
capital, performance and results, and anticipated liquidity discussed
herein are forward-looking and therefore are subject to certain risks
and uncertainties, including those discussed herein among others. In
addition, any forward-looking information regarding the operations of
the Company will be affected by the ability of individual stores to meet
planned revenue levels, the speed at which individual retail stores
reach profitability, costs and expenses being realized at higher than
expected levels, the continued ability to purchase product from
Whirlpool at acceptable prices, the Company's ability to secure an
adequate supply of used appliances for resale, the continued
availability of the Company's current line of credit, the raising of
additional working capital, the renewal of the contract with Edison for
the fourth quarter of 1998 and in 1999 and the ability and timing of
Edison to deliver units under its expected contract with the Company.
PART II. OTHER INFORMATION
- - --------------------------------------------------------------------------------
ITEM 1 - LEGAL PROCEEDINGS
The Company was involved in certain legal proceedings arising from the
cancellation of leases in connection with the closing of certain
facilities. The Company has established a reserve for lease settlements
and closing costs. (See Note 2 to the Consolidated Financial
Statements.)
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
In July 1998, the Company issued 12% subordinated promissory notes in
the aggregate principal amount of $275,000, which notes were repaid
with the proceeds from the September 1998 Loan. The lenders under such
notes received an aggregate of 68,750 warrants to purchase the
Company's Common Stock at $2.25 per share. Such warrants are
exercisable for three years after July 1998. The securities were issued
pursuant to section 4(2) of the Securities Act of 1933.
The Company entered into a loan agreement with Medallion Capital, Inc.
("Medallion") in connection with the September 1998 Loan discussed
above. The Company issued to Medallion, in connection with the
September 1998 Loan, a warrant to purchase 700,000 shares of Common
Stock at $2.50 per share, which price may adjusted in certain
circumstances. Such warrants may be exercised by Medallion prior to the
latter of September 10, 1998 or two years after the repayment in full
of the September 1998 Loan. Dougherty Summit Securities LLC acted as
placement agent in relation to the September 1998 Loan. The Company
paid the agent compensation including a placement agent fee of $180,000
and warrants to purchase 125,000 shares of the Company's Common Stock
at an exercise price of $2.50 per share. In addition, the Company has
agreed that for an 18-month period commencing September 9, 1998 that
the Company may not complete any similar transaction or any equity
transaction without first offering the agent a first right of refusal
to participate in such transaction. The Company sold the securities
pursuant to section 4(2) of the Securities Act of 1933.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5 - OTHER INFORMATION
OTHER INFORMATION - continued
Shareholder Proposals:
Pursuant to the rules of the Securities and Exchange Commission
("SEC"), any shareholder wishing to have a proposal considered for
inclusion in the Company's proxy solicitation material for the 1999
Annual Meeting of Shareholders must set forth such proposal in writing
and file it with the Secretary of the Company no later than November
24, 1998. Pursuant to SEC Rule 14a-4(c)(1), any shareholder wishing to
have a proposal considered at the 1999 Annual Meeting of Shareholders,
but not submitted for inclusion in the Company's proxy solicitation
material, must set forth such proposal in writing and file it with the
Secretary of the Company no later than February 8, 1999 and failure to
notify the Company by such date would allow the Company's proxies to
use their discretionary voting authority when the proposal is raised at
the Annual Meeting (to vote for or against the proposal) without any
discussion of the matter in the proxy materials.
Other Events:
Effective September 8, 1998, the Company was delisted from The Nasdaq
SmallCap Market. The Company cited the fact that it no longer complied
with The Nasdaq Stock Market's continued listing requirements. In
addition, the Company announced that it is continuing to pursue
additional lines of credit.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) (i) Exhibit 10.1 - Loan Agreement between Medallion Capital,
Inc. and Appliance Recycling Centers of America, Inc. dated
September 10, 1998.
(ii) Exhibit 10.2 - Promissory note of the Company to Medallion
Capital, Inc. in the principal amount of $3,500,000 due
September 30, 2005.
(iii) Exhibit 10.3 - Security to agreement of the Company.
(iv) Exhibit 10.4 - Warrant of the Company in favor of Medallion
Capital, Inc. for 700,000 shares of the Company's Common
Stock.
(v) Exhibit No. 27 - Financial Data Schedule.
(b) The Company filed a report on Form 8-K in September 1998
announcing that the Company was delisted from The Nasdaq
SmallCap Market effective September 8, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Appliance Recycling Centers of America, Inc.
Registrant
Date: November 17, 1998 /s/Edward R. Cameron
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Edward R. Cameron
President
Date: November 17, 1998 /s/Kent S. McCoy
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Kent S. McCoy
Chief Financial Officer